14/9/2012: Another Indo 'Property Boom Cometh' Missive

An interesting article in the Indo on house prices vs debate about the property tax or site value tax - link here.

A key phrase that caught my eye is: "CSO reports show that prices increased in Dublin".

The latest CSO report we have is that covering data through July 2012, which states:

• Dublin All Residential Properties: June prices down 1.0% m/m (down 0.3% on 3 mo before June, down 16.4% on 12 month to June 2012); July prices down 0.3% m/m (down 1.2% on 3mo before and down 16.6% on 12 mo before);
• Dublin Houses: June down 0.8% m/m (0.2% on 3 mo ago, down 16.4% y/y) and July down 0.2% m/m (down 0.5% on 3mo ago and down 16.7% on a year ago);
• Dublin Apartments down m/m, on 3mo and y/y in May, June and in July down 3.9% m/m, down 8.6% on 3 mo previous and down 19.6% on 12 mo ago.

So unless Indo has either discovered some new data set from CSO, or it has some CSO data on dog houses and parking spots in Dublin (all of which might have gone up in July), then what on earth are they talking about?

14/9/2012: Russian CB raises rates

Bank of Russia hiked key refinancing rate to 8.25 by 25bps on the foot of rising inflation pressures, with current rate back at the levels seen last in November 2011. The bank also hiked overnight repo rate to 5.5% and deposit rate to 4.25%.

Inflation in agricultural commodities is the core driver as Russia raised some food tariffs and as weaker crops bit into domestic supply. Imports demand for agricultural goods and relative pressure on the ruble vis USD are additional factors.

The signal from the BR is relatively clear: although Russian economic growth has been under some pressure in H1 2012, inflation is back on the rise, hitting 5.9% in August up on record low of 3.6% back in Q2 2012. BR target is for inflation at 5-6% so the move is reactionary, rather than precautious. The balance in BR decision is between containing inflation and political fallout from rising food prices, associated pressure on the ruble, against the corporate sector demand for capital. In other words, the BR is comfortable with the overall levels of investment in the economy in the short run. This highlights the dilema faced by the Russian policymakers, who are aware that Russia needs to push up domestic investment in core areas where capital modernization is desperately required: manufacturing and industrial base, as well as basic infrastructure. This longer term objective is likely to be supported by a combination of public investment and incentives for longer term private investment. With this in mind, recent restructuring of the Russian SWF and easing of the new SWF mandate to invest in a range of financial instruments, including listed equities.

Chart for Russian CPI forecasts:

13/9/2012: Buying more time for the Euro

My recent analysis of the ECB announcement of the OMT in The Globe & Mail

11/9/2012: Inherent limit to artificial intelligence?

In a rather common departure from economics (as defined by rational expectations subset of the discipline) on this blog - here's a fascinating thinking about the artificial intelligence and the bounds of model-induced systems.

Especially close to me, as it explores that which I thought about back in 2003-2004 when I wrote an essay on the role of leaps of faith (irrational and discontinuous jumps in human creativity and thinking) as the foundation for humanity and, thus, a foundation for recognition of the property rights over uncertainty.

10/9/2012: Ireland's flop in securing European Science Funding

Departing from the IMF, European Research Council has released the list of 2012 winning projects that obtained financial support from the Council under the ERC Starting Grant results, totaling €800 million. The link to the list is here.

Now, a quick run through the headline results:

• Ireland scored 4 projects (2 each for TCD and UCD)
• Portugal (not a country we in Ireland usually associate with being the Land of Scholars) scored same as Ireland
• Israel scored 24 projects
• Austria 9 projects
• Belgium 19 projects
• Switzerland 33 projects
• Netherlands scored 51 project
• Finland 8 projects
• Denmark 13 projects
• Sweden 22 projects
• And to add insult to our injury: University of Bristol (UK) and University of Edinburgh scored 5 projects each (more than the entire country of Ireland), while University of Warwick 4 projects (same as Ireland as a whole)
• University College London scored 16 projects
• In some consolation, powerhouse of knowledge, Northern Ireland, scored none

Here's a handy chart from ERC:

But wait, it gets worse. When broken down by nationality of grantees, Ireland has 7 Irish nationals granted research proposals:

Which includes more Irish national academics working ABROAD than in Ireland:

And, among the researchers who got grants in Ireland, there are a number of non-nationals:

You can check the above in here.

So that strategy on funding and managing research in Ireland - it is clearly working marvels... oh, and do you now think Irish Universities poor rankings have nothing to do with real world outcomes?..

10/9/2012: Corporate debt iceberg

Another topic, much ignored by the Irish media and the Government and covered by the IMF in today's releases is the corporate debt.

The chart below shows the extent of debt overhang in Ireland:

Here's what IMF has to say on that (emphasis mine):
"Despite an overall decline in corporate debt, an increasing number of firms are facing difficulties covering interest payments on debt. Interest coverage ratios [ratio of earnings before interest and taxes (EBIT) to interest expenses] have declined, with the interest coverage for the median firm having decreased from 6.9 in 2002 to 0.8 in 2009, and with an increasing number of firms not generating sufficient income to cover interest payments on outstanding debt. ... Moreover, the interest coverage is markedly lower for SMEs, with a median of 0.8 compared to 1.9 for large firms. The decline in firm profitability associated with depressed demand is playing an important role in the reduction in interest coverage ratio. This suggests that financing constraints are particularly important among SMEs and in property-related sectors."

In other words, whatever supply of credit is doing, demand for credit is severely constrained by deterioration in firms' financial sustainability.

Although "Leverage for the median firm (which is a small firm) has fallen to 46 percent of equity, with the usage of bank debt showing a similar decline. The data also indicate that trade credit and other non-debt liabilities play an important role in the financing of SMEs, together with internal financing from retained earnings." Although leverage overall has dropped, debt affordability has fallen off the cliff:

Why? "The decline in firm profitability associated with depressed demand is playing an important role in the reduction in interest coverage ratio. This suggests that financing constraints are particularly important among SMEs and in property-related sectors."


So what can be done? Here's the list of IMF outlined options:


"Credit guarantees or subsidies on SME loans can in principle stimulate SME financing. ... Until recently, Ireland was one of the few OECD countries without some form of loan guarantee scheme. ...However, the international experience with SME lending schemes is mixed. ...Moreover, the historical experience shows that credit guarantee schemes can only be effective when there are competent, financially sound banks, with adequate staff to effectively screen and monitor SME loans. ...

Government support for SMEs will need to be complemented with progress in improving the operational capacity of banks to work out loans. The restructuring of SMEs on a case-by-case basis is resource intensive yet important to ensure that where a viable core business exists, that it has the possibility to invest and grow, and contribute to broader economic recovery.

Considering the number of SMEs, it would not be appropriate to rely principally on court-based bankruptcy procedures. Rather, banks will need to build their capacity to design and implement work outs though out-of-court workout processes. Drawing on international expertise may well be needed to help major banks build capacity in this area.

The government could also explore ways to facilitate the securitization of SME loans. However, liquidity premia currently demanded by market participants even on senior
tranches, plus the inability of the Irish government to offer substantial credit enhancements
on such securitizations given the low sovereign credit rating, imply that, at least for the
moment, the market for securitization of SME loans is limited."

So, in other words: NOTHING can be done on the scale required. We are boxed into the corner with SMEs debt overhang too. All state resources and economy's resources wasted on rescuing the banks bondholdres, folks. No powder left for the rest of the economy. Sit tight and pray for a miracle.



Aside: An interesting observation via the IMF concerning the links between the negative equity and property values and firms formation: "With depressed home prices it has become more difficult to finance a new firm using home equity, which has hampered job creation."